VALUATION becomes a key matter in taxation when you are transacting real property or other assets which do not have a defined value.
If the values are not clearly determined or where the transactions are not undertaken on an arm’s length basis, then market value is normally used to substitute the sale proceeds.
Market value is defined in the Income Tax Act as the price which would be fetched if sold in a transaction between independent persons dealing at arm's length. However, the legislation does not provide any guidance on the methodology to determine the market value.
Valuation is also key in the Real Property Gains Tax Act and the Stamp Act. There are many paragraphs that specifically refer to market value in Schedule 2 of the Real Property Gains Tax Act and the First Schedule of the Stamp Act.
Where are the problems
► Income tax
In the area of income tax, problems around valuation will arise when stocks are withdrawn, and market value must be determined for the transfer of stocks to fixed assets. This is quite common when property developers transfer their stock in trade to investment properties (e.g. own office or long-term rental). The market value will need to be determined on the day the asset is withdrawn and transferred to fixed assets.
Since the transfer will be internal in nature, the transaction must be recorded on an arm’s length basis, and the usual method used in determining the value will be the prices of similar properties in the same vicinity.
Differences of opinion will arise between the Valuation and Property Services Department (JPPH) and private valuers, and this will often lead to disputes because generally the valuation by JPPH will be higher than that of private valuers.
Other examples where market value becomes a critical factor in the amount of taxes you pay is when transactions occur between related parties and the transfer pricing rules kick which require the transactions to be at arm’s length. This can include the provision of services, goods, intangibles, and financing between related parties.
Market value also becomes an issue when it comes to claiming capital allowances on plant and machinery that have been used for business outside Malaysia and thereafter transferred to a Malaysian business. A similar problem arises if the plant or machinery has been used for non-business purposes and is subsequently brought into use for business purpose.
► Real Property Gains Tax (RPGT)
Market value is used in many instances as a substitute to sale proceeds in RPGT. This occurs when there are gifts of property, exchanges of property, or transactions between connected parties otherwise than by way of arm’s length. In determining whether a company is a real property company, valuations at different points in time will be required.
► Stamp Duty
Stamp duty is based on the market value whenever there are transactions involving real property. All transactions involving stamp duty will need to be sent for adjudication which will involve valuation. The Stamp Office will not accept the face value of the transactions between two third parties and it will insist on the market value being determined by JPPH. This again very often will lead to disputes.
► Anti-avoidance
Generally, under all tax legislation, the director-general has the power to disregard the values used by the taxpayers if he suspects that the transactions have not taken place on an arm’s length, he can substitute it with the market price.
Taxpayers should pay particular attention to valuation and ensure that their valuation used to determine the market value is supportable with external verifiable evidence to defend their position in a court of law.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).
